Stocks reached record highs on Monday but that shouldn’t sway investors from seeking even more gains to come, according to Bank of America Merrill Lynch.
The bank sees 10 reasons to stay bullish on the SP 500 instead of other kinds of investments such as Treasurys, Savita Subramanian, head equity and quant strategist at BofA, said in a March 1 report obtained by Newsmax Finance:
- Investor sentiment is pessimistic: “Wall Street sentiment is at bearish extremes with strategists recommending just a 52 percent stock allocation,” according to the report. When investment strategists have been this bearish in the past, the SP 500 rose 98 percent of the time, with average gains of 27 percent.
- Fund managers have lots of cash: “Cash levels remain high at 4.7 percent,” the bank said. Stocks will get support as fund managers put that money to work in the market.
- Rotation from bonds to stocks “hasn’t happened yet”: Investors have put $500 billion into stock funds since 2009, compared with more than $900 billion for bonds. “The Great Rotation out of bonds into stocks has more to go,” BofA said.
- Companies have less debt than at prior market peaks: “The SP 500 has cut its leverage ratio to just above a third of its 2000 and 2007 peaks.”
- Companies have lots of cash: SP 500 companies had more than $1.4 trillion in cash as of the end of the third quarter, an all-time high. “Unlike the U.S. government and the U.S. consumer, corporate balance sheets are as healthy as ever.”
- Strong investment income: “Nearly half of the SP 500 pays a dividend yield above the 10-year Treasury yield, close to its three-decade high,” according to BofA. “The SP 500 payout ratio sits near century lows.” The 10-year Treasury yield currently was about 2.1 percent on March 2.
- Stocks aren’t too expensive: While the SP 500 is trading above its average trailing price-to-earnings ratio of 16 times, stocks are inexpensive based on such metrics as price to free cash flow and enterprise value to earnings before interest, taxes, depreciation and amortization, BofA said.
- U.S. companies are innovative: “U.S. research and development to GDP has been rising over time, and the U.S. spends more on RD than any other country including China,” the report said. “RD spenders typically outperform.
- SP 500 has the best companies: U.S. stocks may be 10 percent more expensive than global stocks, but that premium is warranted, BofA said. The SP 500 “is a higher-quality index with lower beta and that offers greater transparency.” Beta is a measure of stock volatility compared with the broader market.
- Lower oil prices and central bank stimulus will help: The crash in oil prices since the summer of 2014 lowers expenses for a broad group of companies outside the energy industry. Meanwhile, the European Central Bank, Bank of Japan and People’s Bank of China have policies to stimulate economic growth.
If investors need even another reason to buy stocks, BofA points out that stocks are more likely to gain over the longer term.
In the shorter term, March is considered a good month for stocks. March has been positive in two out of years since World War II, said Sam Stovall, chief equity strategist at SP/Capital IQ.
The SP 500 has gained 1.25 percent on average during March, he told CNBC.